Published: Fri, September 22, 2017
Business | By Max Garcia

Fed to wind down historic program used to rescue economy

Fed to wind down historic program used to rescue economy

Investors would be focusing on Fed's interest rate decision today, and it is widely expected that the United States central bank will announce at the end of its two-day assembly later in the day that they will be winding down their $4.4 trillion balance sheet by October.

In line with expectations, the Fed said it would begin in October to cut its roughly $4.2 trillion in US Treasury bonds and mortgage-backed securities holdings by initially cutting up to $10 billion each month from the amount of maturing securities it reinvests.

While the Fed's latest policy stance was viewed as hawkish for the most part, the central bank did lower again its estimated long-term "neutral" interest rate from 3.0 per cent to 2.75 per cent, reflecting concerns about overall economic vitality.

New economic projections released after the Fed's two-day policy meeting showed 11 of 16 officials see the "appropriate" level for the federal funds rate, the central bank's benchmark interest rate, to be in a range between 1.25% and 1.50% by the end of 2017, or 0.25 percentage points above the current level. In June it projected that core inflation would hit 1.7% this year and 2% next year. Secondly, the Fed does not want to return its balance sheet to $2-2.5 trillion but is, instead, targeting far higher levels.

Before hurricanes Harvey, Irma and Maria, the US economy was in a good place, says Robert Hughes, senior research fellow at the American Institute for Economic Research. Three additional hikes are possible for next year.

"In view of realised and expected labour market conditions and inflation, the Committee chose to maintain the target range for the federal funds rate at 1-1.25 percent".

The central bank also expects inflation will remain stubbornly low.

Brent crude futures rose $1.15, or 2.1 percent, to settle at $56.29 a barrel, while USA crude futures gained 93 cents, or 1.9 percent, to settle at $50.41.

The central bank said Hurricanes Harvey, Irma, and Maris were expected to affect United States economy in the near term, while they would not alter the course of the economy in the medium term.

The sustainability of quantitative tightening measures is subject to future economic performance and financial markets' durability.

News about the beginning of the reduction of the balance sheet, together with forecasts of a rate increase this year and three hikes in 2018, helped Dollars to strengthen sharply yesterday.

On top of that, the devastation caused by recent severe hurricanes could make it hard for Fed policymakers to get a solid read on the economy in the coming weeks as they decide whether to enact another small hike in a key interest rate.

Global stock markets were little changed Wednesday as investors took to the sidelines ahead of the U.S. Federal Reserve's announcement of the results of its meeting.

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